Central banks have pulled out all the stops this month. It’s growth or bust as far as the guardians of the world’s currencies are concerned.
The Federal Reserve has launched QE-infinity. Europe is inching its way towards quantitative easing too. And this week, Japan joined in by adding a surprise ¥10trn (around £80bn) to the mix.
Shares and other “risk-on” assets have been lifted by the money flood. But perhaps the biggest beneficiary has been gold.
Indeed, three months ago, when gold was near two-year lows, David Stevenson of the Fleet Street Letter urged readers to take advantage of the dip. Anyone who did would have seen the value of their investment rise by 11% in dollar terms since the start of August.
But even if you didn’t buy in then, it’s not too late, says David in the latest issue. Because quantitative easing (QE) will push prices far higher.
“Every time more QE has been announced, equity markets have jumped up. And some of the extra cash that’s been created has leaked out into commodity markets. Where prices are already under upward pressure, this has encouraged speculation and created inflation risks. The history of QE shows that those inflation fears drive up the value of gold.”
Whether QE will improve the economies involved is doubtful, says David. However, what matters right now for your money is how it affects your investments. “We can’t stop the monetary officials fiddling with the system. But we can buy more insurance protection, which means buying more gold now still makes sense”.
Gold miners could be even more appealing than just buying gold, says David. They’ve had a miserable time of it, but that could be set to change.
“The NYSE Arca Gold BUGS Index, otherwise known as the HUI, is an index of major gold mining companies. The HUI only includes miners who ‘hedge’ less than 18 months’-worth of their future production.
“This means the index should give investors decent exposure to near-term gold price moves. But despite running up this week, the HUI is almost unchanged on balance in 2012. So gold stocks are lagging well behind the metal’s price. That creates share buying opportunities in the sector.”
This is exactly the type of market anomaly that David likes to identify and profit from. Another ‘market mistake’ that David has spotted is the way that dividends are distributed.
In fact, David has spotted a way that you can collect twice as much income as everyone else, even if you buy exactly the same shares. He’s just released a report explaining how it works.
Avoid China
There’s no doubt that the QE we’ve seen over the last few weeks will have a powerful effect on the markets, says John Stepek in Monday’s Money Morning. But that doesn’t mean everything will go up. China in particular looks susceptible.
On the face of it, China’s stock market should be a good bet, says John. It’s fallen 70% since 2007 – now it looks pretty cheap. But with investors just coming to terms with the fact that the Chinese economy is slowing down, something even worse could be around the corner.
“If something nastier happens – like a system-wide banking crisis that the authorities have difficulty sweeping under the carpet – then stocks could fall yet further”, says John.
What’s really scary is the explosion of credit in China. “To cut a long story short, the Chinese stimulus package of 2008/09 was funnelled through the banks. As a result, they loaned money for lots of prestige projects or economically wasteful investments. On top of that, there’s all the money in China’s ‘shadow’ banking system. These are effectively ‘off-balance-sheet’ loans, similar to the loans that brought down Western banks.”
None of this is disputed. Where the difference of opinion comes in, is that China bulls think “China’s canny leaders can fix the banking system at any time they want”.
That seems a big leap of faith, says John. After all, “credit bubbles throughout history end badly. No one has convinced me yet that China has come up with a debt hangover cure that actually works.”
Throw in the opaque transfer of power happening in China at the moment and the military tension with Japan, and it’s clear that investing in China is a lot more risky than the bulls make out.
China’s problems are also a reason to avoid industrial metal miners and commodity dependent economies, such as Australia. “QE3 might be able to prop up a lot of asset prices, but it’ll have difficulty keeping industrial commodity prices up if a steady swathe of bad news keeps emerging from China.”
You can read more about the impact of QE3 and our latest views on all asset classes in the latest issue of MoneyWeek magazine.
Why politicians make things worse
On her blog, Merryn Somerset Webb tackled the problem of politicians and public finances. Inspired by a book she’s reading – The Mess We’re In: Why Politicians Can’t Fix Financial Crises by Guy Fraser Sampson – Merryn concludes the reason is because politicians cause most of the problems.
Quoting the book, Merryn notes that: “within a Western democratic system, we place our politicians in an impossible situation. We ask them to make decisions with long-term effects,” but because “they must seek election every few years, we more or less force them to consider only the short-term consequences”.
That is a real problem in economics, as the policies that are most likely to confer a long-term benefit are also likely to confer short-term pain. Similarly those that give an advantage in the short term almost always cause long-term damage.
That applies directly to Britain’s challenge of cutting its national debt. “Summoning up the will and the political support is difficult, and any agreement on it is bound to be fragile – given the non-stop demands of electorates.”
So what’s the solution? Merryn suspects a written constitution that forces governments to produce a balanced budget could be one option. Lord Lamont, who was chancellor when Britain was forced to leave the European Exchange Rate Mechanism (ERM) notes that one upside of the ERM was that it helped bring inflation down from double figures to 2%.
That would never have happened without an external structure in place to force it, as “short term considerations would have taken priority over long term considerations”.
As you’d expect, readers had a wide range of views. ‘Chester’ broadly agreed with Merryn, commenting: “There can be no pretence of policy ‘for the national good’. Govt is parasitic by nature and reactive in behaviour – there can be no worse combination of absolute power to conspire against the principle of sound money”
However, ‘Dream Jeanie’ felt that we need to look at the British government with a bit of perspective: “At least we don’t have death camps, war within the country or mass starvation or mass homelessness.”
If you haven’t already had your say, because politicians cause most of the problems.
Learn from the Space Shuttle’s failures
Another problem with governments, says Tim Price in The Price Report newsletter, is that they take on more than they can handle.
Take America’s space programme. After the spectacular success of landing on the moon, the government’s space agency NASA, decided to develop a space shuttle programme.
This “was mad because it was justified only by mad bureaucratic logic”, says Tim Price. “The shuttle had achieved a kind of Pyrrhic re-useability. The cost of refurbishing and repairing it after each flight vastly exceeded the cost of standard rockets.
“Every major component it had was continually redesigned and rebuilt. Every cost estimate offered to Congress was exceeded multiple times. Audits never made public uncovered fraud and spending abuses running into many billions of dollars.”
And as if that wasn’t bad enough, the shuttle failed technically as well. It “could barely achieve low orbits; high orbits were impossible. The shuttle never came close to reaching the moon.
“Supposed to fly once per week, the shuttle barely achieved a tenth of that rate. When it did fly, the shuttle ended up killing more astronauts than any other space vehicle in history.
Out of five shuttles, two ended their missions in flames: a 40% failure rate that would not be tolerated in any other sector”.
It ended up costing $200bn with little to show for it, says Tim. So how did it happen? The problem was that “each incremental step in the failed space shuttle programme made sense at the time”. It’s only now, looking back, we can see how badly the programme got out of control.
The same is now happening with central banks, says Tim. Step by step their responsibility has grown, and they are now trying to control every aspect of the economy. Just like the shuttle programme, it may seem to make sense at the time, but will be come to be seen as a colossal failure. After all, centralised control of the economy didn’t work in the Soviet Union – so why would it work now?
But The Price Report isn’t about bewailing everything that’s wrong with modern life. It’s about how to profit from it – and Tim has found some great ways that investors can profit from the central bankers’ “mission creep”.
Another video I’d highly recommend is this week’s video tutorial from MoneyWeek’s deputy editor, Tim Bennett. The title – Beginner’s guide to mortgages – says it all. After all, a mortgage is the biggest debt most of us will ever take on. So choosing the right one is vital. Watch this to learn the mortgages basics and which pitfalls to avoid.
To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we’ve listed them below.
Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• Matthew Partridge
• David Stevenson